Greetings, Investor.
Monday, July 9, 2007, was a good day for shareholders and investors of two blue-chip companies. The good news could be bullish in the long run.
First, Johnson & Johnson said it would buy back its common stock for up to $10 billion.
Then, ConocoPhillips announced a $15 billion share buyback programme, which is $13 billion more than the $2 billion that was left in an earlier buyback programme.
But why is a programme to buy back shares a good sign for investors? Why would a repurchase have such a good chance of going up? One reason can be found in the simple laws of supply and demand: When a company buys back its own shares, the number of outstanding shares goes down, which should make the price of the remaining shares go up.
Another reason is that companies that buy back their own shares are so sure of their future that they are willing to use company money to buy them. This is important to pay attention to because the executives and Board of Directors of a company have access to information that the rest of us don't.
In this way, repurchase programmes are like insiders buying shares of their own companies for their own accounts. Both of these things show that people are optimistic about the company's future, which is another bullish sign.
In a few words:
When a company announces a stock buyback programme, it reduces the number of shares it has on the market. As a result, each share is worth more and represents a bigger share of the company's equity.
So, when you're building your portfolio, you could look for strong, solid companies that do these kinds of shareholder-friendly things and hold on to them as long as the basics are still good.
One of the best examples is the Washington Post, which was once only worth $5 to $10 per share. It has already been worth as much as $650. That's what I call value over time!
But watch out! Even though buybacks can make investors a lot of money in the long run, they can be bad if a company pays more for its stock than it is worth. In an overpriced market, it would be a bad idea for management to buy any stock, even if it was its own.
Instead, the company should invest the money in things that are easy to turn into cash. So, when the market goes the other way and is trading below its true value, shares of the company can be bought back at a discount, making sure that current shareholders get the most benefit. Remember that even the best investment in the world isn't a good investment if you pay too much for it.
Yours in Succeeding in Business
Ricky Schmidt
